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Financial literacy for the rising generation and beyond


Our solutions to common oversights among wealthy families

Affluent families have highly competent, capable and specialist professional advisors to help manage their investments, legal affairs, tax obligations, business & financial operations and more. If a family member is not planning on a career as the Chief Executive Officer or Chief Financial Officer of the family business, then why is financial competence important? Because two-thirds of wealth transfers do not succeed. The inability or unwillingness of heirs, successors, and beneficiaries is a major reason for this.

The answers to this question could determine future family prosperity. Even if they are not taking an active role in the family business, family members need to be able to manage their own household, be prepared to step into a more active role managing finances as circumstances change—and circumstances will change—to have the financial literacy and business acumen to ensure multi-generational continuity of the family wealth.

Three reasons to focus on financial literacy

First, family members either have or will eventually have their own household. While everyone should strive to be financially literate, high net worth individuals may have been raised in an environment where money was never an obstacle, and thus never felt they needed to learn how to manage money. It’s important to understand that wealth is not limitless so they can manage their own finances individually. Everyone should be able to manage their own household in a way that achieves their short and long-term financial and family goals. For many families, this is as normal as learning to drive or write a resume.

Second, if the past three years taught us anything, it is that life circumstances can change in a moment. A person could suddenly lose a parent, spouse, or advisor, and find themselves responsible for managing substantial wealth and financial matters—along with managing family dynamics. When one has relied on others to handle the finances, these new responsibilities can range from daunting to outright frightening. Sharing responsibilities and communicating openly across generations can help prepare for transfer of financial, intellectual, and social capital.

Third, and most importantly, evidence shows that heirs who are unprepared to manage the wealth they inherit is a leading reason for wealth erosion from generation to generation. Clearly, there are compelling reasons why everyone should be financially literate.

A couple had considerable wealth from exercising the wife’s stock options at a technology company. The wife’s husband handled all the family finances throughout their marriage, as she focused on her interests and passions during their retirement. The husband passed away from a sudden heart attack in his late sixties, leaving the surviving spouse to manage their various real properties, make investment decisions and estate planning decisions. Unfortunately, the wife was not prepared to tackle these new challenges, adding considerable angst to an already difficult and challenging situation.

What is financial literacy and how can parents help the next generation achieve it?

What is financial literacy? An understanding of financial terms, concepts, and practices that develops to a capability aligned with the competence level required to match the individual’s circumstances. Simply put, having the knowledge and maturity to manage your own responsibilities. Not everyone needs the same level of financial competence or literacy. A Chief Financial Officer or Chief Investment Officer will need a level of financial literacy far greater than most. But everyone should be financially competent to accomplish what their personal responsibilities require or likely could require.

What could ultra-high net wealth families consider when helping their children with financial literacy? The first thing to understand is that they are teaching their children about their financial values everyday—whether they realize it or not. Children pick up quickly on parents’ attitudes, relationship, and values about money, spending, and saving. They listen to what you say and always watch what you do. Parents should be intentional and purposeful when teaching their children about their financial values—remain aware that children are picking up on, and perhaps mimicking their own habits around money.

Parents have an opportunity to teach their children what money is and what it isn’t. It’s not a piece of plastic or an app on a phone. It is good for children to understand that money is not limitless. Financial values can be instilled at a young age to help children appreciate the family wealth and help shape proper attitudes toward it. The best way to develop competence in financial matters is to combine topical learning with practical experience that reinforces the learning.

Where to start? Besides basic business investment concepts and practices, a well-rounded approach to finance is essential. From macroeconomic factors that shape finance in the larger economy (including government and business), to microeconomic matters that touch their lives directly (such as personal financial responsibility, actively earning income, taxes, and trusts), financial literacy encompasses a broad range of topics.

Along with teaching financial principles and money management, parents should develop a maturity and age-appropriate “training program” to reinforce the ongoing learning experience. Early on it could consist of training a child to save, spend, and donate a portion of their allowance. During the teen years it can be managing earnings from a summer job or helping them manage a neighborhood mowing business. Later, it may be participating in the investment or grant committees of the family foundation. Regardless of the life stage, practical experience will reinforce what they have learned.

It is important to keep in mind that financial literacy can be developed at any stage of life. Affluent families would be prudent to discuss with their financial advisor how to prepare their heirs and successors for the wealth they will inherit, regardless of the ages of their children. The financial advisor and other professionals will play key roles in the education process, not only to avoid what might seem like parental lectures, but to introduce or deepen the relationship between the children and the parents’ professional advisor network. If parents have delayed having open financial conversations with their children, it is never too late to start.

Raising children is a wonderful experience. We all have hopes and dreams for our children. We want the best for them. We try to teach them our values, how to deal with life’s difficulties, and provide the best education we can for them. Parents should be purposeful about educating their children about financial matters—these are essential life skills regardless of your level of financial affluence.

Five takeaways for raising generation financial literacy

  1. Be purposeful about teaching children your financial values.
  2. Make learning fun, interesting, maturity, and age-appropriate. Be careful about who you select to teach them.
  3. Be comfortable with a plan that spans a number of years and transitions into the next generation. Review and adapt your plan regularly.
  4. Reinforce learning with practical experiences.
  5. It is never too early or late to begin to learn financial competency.

This article was originally published by BDO US.

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